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In 2010, Congress amended Internal Revenue Code (IRC) sec. 6201 by adding subsection (a)(4), which authorizes the IRS to assess and collect the amount of criminal restitution ordered for failure to pay any tax in the same manner as if the restitution was a tax. The assessment could be made at any time after all appeals were concluded and the right to appeal from the criminal restitution order had expired. The person against whom restitution was ordered could not challenge the restitution amount on the basis of the existence or amount of the underlying tax liability. In Carpenter v Commissioner, 152 TC No. 12 (April 18, 2019), the Tax Court held that a payment schedule set by the district court in imposing restitution did not limit the IRS’s ability to assess or collect restitution.

Carpenter pled guilty to tax perjury (IRC 7206(1)) for 2005 and 2006. He was sentenced by the district court to 27 months imprisonment and ordered to pay $507,995 restitution. The district court found that Carpenter did not have the financial ability to pay a fine or interest on the amount of any penalty. It ordered him to pay the restitution immediately but if he could not to so “he must pay $100 per month” until the restitution was paid. Carpenter complied with the restitution payment schedule and, after his period of supervised release ended the court ordered that the unpaid restitution “be collected by civil means through the US Attorney’s Office.” The US Attorney filed liens and levied Carpenter’s social security benefits. The IRS, in the meantime, assessed the restitution, sent notice and demand for payment and followed with lien and levy CDP notices. Carpenter protested on the ground that the IRS lacked authority to enforce the restitution order, could not initiate administrative collection action without a district court order and could not collect more than the amount set in the district court’s payment schedule. He expressly waived his right to seek a collection alternative. Appeals sustained the IRS’s collection action and Carpenter petitioned the Tax Court.

While the case was pending, the Tax Court in Klein v. Commissioner, 149 TC 341, held that sec. 6204(a)(4) was just a means to “facilitate bookkeeping.” Thus, the IRS could not assess statutory interest and penalties under sec. 6201(a)(4), just the restitution amount. The IRS therefore abated the interest and penalties assessed against Carpenter. The Court further held that in enacting subsection (a)(4) Congress “expanded the authority to collect actively on criminal restitution orders following summary assessment,” including by exempting the assessment from the Code’s statute of limitations and limiting the ability to challenge the amount of restitution. As a result, the IRS’s authority to assess and collect criminal tax restitution was independent of Title 18.

The Tax Court also rejected Carpenter’s argument that the district court‘s restitution order limits the amount the IRS could collect. Although in restitution orders a district court can set a payment schedule which becomes part of a final judgement that may not be modified, Title 18 doesn’t require the IRS to obtain a court order before it can assess restitution. Further, a restitution order is due immediately unless specified otherwise, including in the judge’s oral pronouncements at sentencing. Where a court orders restitution is due only in accordance with a payment schedule and not immediately, the Government may only collect pursuant to the schedule. But where the district court specifies immediate full payment, a payment schedule contained in the order does not limit the Government’s ability to pursue other means of securing the restitution amount. At Carpenter’s sentencing the district court made it clear it did not intend to limit the IRS’s collection efforts. The IRS acted properly in filing its notice of federal tax lien and in issuing its levy notice. Further, under the statute Carpenter was barred from challenging the amount of restitution. Appeals had considered all required matters and took into account the district court payment schedule and the US Attorney’s collection efforts. Its determination was therefore sustained.

The Court ended by noting that although Carpenter did not propose any collection alternative, he could still do so outside of CDP by submitting an installment agreement request.

Restitution in a criminal case is meant to compensate the victims of a crime. It is paid to the US Attorney and the restitution amount cannot be decreased or compromised. As a result, regardless of the financial situation of a person convicted of a tax crime, neither the Department of Justice nor the IRS can agree to compromise a restitution order by settling for less than the full amount of restitution payable to the IRS.

Contact Robert S. Horwitz at horwitz@taxlitigator.com or 310.281.3200 Mr. Horwitz is a principal at Hochman Salkin Toscher Perez, P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division. He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions.